3 Manufacturing Tools Stocks to Watch Despite Industry Headwinds

Weakness in the manufacturing sector, slowdown in new orders and lingering effects of supply-chain issues have marred the outlook of the Zacks Manufacturing-Tools & Related Products industry. The industry also faces challenges due to a shortage of skilled labor in the United States.

However, industry participants’ focus on cost-control measures and investments in product development have allowed them to stay competitive in the market. Core & Main, Inc. CNM, Stanley Black & Decker, Inc. SWK and Kennametal Inc. KMT appear well-poised to stay afloat in challenging market conditions.

About the Industry

The Zacks Manufacturing-Tools & Related Products industry comprises companies that develop and distribute hand and mechanics tools, hydraulic tools, engineered fastening systems and heavy-lifting technology solutions. Arc-welding products, robotic-welding packages, fume-extraction equipment, oxy-fuel cutting equipment, plasma cutters, healthcare solutions, electronic security solutions and other products are also produced by some tool-makers. The highly advanced tools are used in industrial, commercial, oil & gas, mining, automotive and other industries. The providers of electronic security solutions cater to the commercial, retail, government, financial and healthcare markets. Regarding international operations, some industry players provide products and services to customers in North and South America, Japan, Europe, Canada, Asia and the Middle East.

Major Trends Shaping the Manufacturing Tools Industry's

Weakness in the Manufacturing Sector: Weakness in the manufacturing sector has been denting the demand in the industry. After witnessing expansion in economic activities for the second consecutive month in February, the manufacturing sector contracted in March, April, May and June. Per the Institute for Supply Management’s (ISM) report, the Manufacturing Purchasing Manager’s Index touched 49% in June. A figure less than 50% indicates a contraction in manufacturing activity. Also, the New Orders Index remained in the contraction territory for the fifth consecutive month, registering 46.4% in June.

Rising Costs Hurt Margins: Industry participants have been encountering input cost inflation and other expenses, which have been denting profitability. Also, supply-chain issues might increase raw material and other logistics expenses. The latest ISM report’s Supplier Deliveries Index reflects slower deliveries for the seventh straight month in June. The rise in expenses, along with a tough labor market, poses a threat to margins. That said, companies have been focused on cost management initiatives to mitigate cost-related challenges. These include streamlining operational structures, optimizing supply networks and implementing effective pricing policies.

Investments in Product Development & Innovation: Constant focus on innovation by industry players, product upgrades and the development of new products to stay competitive in the market will likely drive growth. While this augurs well for the industry’s long-term growth, hefty investments in research and development often leave companies with highly leveraged balance sheets.

Zacks Industry Rank Indicates Weak Prospects

The Zacks Manufacturing-Tools & Related Products industry, housed within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #163. This rank places it in the bottom 34% of 246 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings prospects for the constituent companies in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are keeping less faith in this group's earnings growth potential. The industry’s earnings estimates for 2025 have moved down 7.3% over the past year.

Despite bleak near-term prospects, we will present a few stocks that you may want to retain in your portfolios. But it is worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Both Sector & S&P 500

The Zacks Manufacturing-Tools & Related Products industry has underperformed the sector and the S&P 500 composite index in the past year.

Over this period, the industry has grown 7.7% compared with the sector and the S&P 500 Index’s rise of 14.8% and 12.4%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward P/E (F12M), which is a commonly used multiple for valuing manufacturing tools and related product stocks, the industry is currently trading at 17.92X compared with the S&P 500’s 22.75X. It is also below the sector’s P/E (F12M) ratio of 20.09X.

In the past five years, the industry has traded as high as 22.13X, as low as 11.65X and at the median of 18.55X, as the chart below shows:

Price-to-Earnings Ratio vs SP500

Price-to-Earnings Ratio vs Sector

3 Manufacturing Tool Stocks to Keep a Tab on

Stanley Black: Headquartered in New Britain, CT, Stanley Black manufactures tools (power and hand tools) and related accessories and engineered fastening systems, among other items. Solid momentum in the Tools & Outdoor segment, driven by strength in its DEWALT business, is expected to fuel SWK’s growth. Cost-reduction efforts and supply-chain optimization programs are also expected to support this Zacks Rank #3 (Hold) company’s margin in the quarters ahead. You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stanley Black reported better-than-expected results in each of the last four quarters, the earnings surprise being 18.4%, on average. Though the company’s shares lost 12.6% in the past year, they rose 27.3% in the past three months.

Price and Consensus: SWK

Core & Main: Based in Saint Louis, MO, CNM provides wastewater, water, storm drainage and fire protection products and services to private water companies, municipalities and professional contractors. The company's products and services are utilized in the maintenance, repair, replacement and construction of infrastructure for water, storm drainage, wastewater and fire protection systems. CNM is benefiting from increased demand for pipes, valves & fittings, storm drainage and meter products. The acquisitions of certain assets and liabilities of ARGCO Northeast LLC in November 2024 also bode well for Core & Main.

The Zacks Consensus Estimate for this Zacks Rank #3 company’s fiscal 2026 (ending January 2026) earnings has been revised upward 1.2% in the past 60 days. Its shares have surged 25.3% in the past year.

Price and Consensus: CNM

Kennametal: Based in Latrobe, PA, Kennametal is a manufacturer, marketer and distributor of high-speed metal cutting tools, tooling systems and wear-resistant parts. Its products are marketed through several channels to the end users, including manufacturers of machine tools, transportation vehicles and others. The company is benefiting from improved supply chain and increasing original equipment manufacturer build rates in the aerospace market in Europe, the Middle East and Africa. Its investments in product development and manufacturing facilities also bode well.

This Zacks Rank #3 company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 27%. The stock has gained 6.1% in the past year.

Price and Consensus: KMT

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Stanley Black & Decker, Inc. (SWK): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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